The Other Alternative Currency

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

With the nearly daily moves to record highs among the hundreds of cryptocurrencies that currently exist, talking about ‘regular’ currencies seems about as out-of-fashion as that hideous shoulder pad trend from the 1980s.

[Millennial readers: see here if you’re confused.]

But there are actually a few currencies out there worth talking about right now.

And top among them, especially for anyone holding US dollars, is the Hong Kong dollar.

The Hong Kong dollar is different because it is ‘pegged’ to the US dollar at a pre-determined rate.

Unlike the euro, pound, yen, etc. whose exchange rates fluctuate on a daily basis (and occasionally have major, violent price swings) the Hong Kong dollar is set at 7.80 HKD per US dollar, plus or minus a very narrow band.

The Hong Kong dollar has effectively traded between 7.75 and 7.85 for the past three decades– a variation of about 0.64%. This barely registers as a rounding error.

Now, there are a handful of other currencies which are also pegged to the US dollar.

Venezuela’s government fixes its bolivar currency to the US dollar at an official rate of roughly 10:1. (Though when I was in the country a few weeks ago the Black Market rate was 30,000:1.)

In Africa, the government of Eritrea pegs its currency (the Nakfa) to the US dollar at a rate of 13.5:1.

Even Cuba’s government pegs its “convertible peso” to the US dollar at 1:1 (less some absurd exchange fee).

But none of these currencies is a viable alternative to the US dollar. The US government’s finances may be in shambles, but Eritrea’s, Cuba’s, and Venezuela’s are in much worse condition.

Hong Kong is a rare exception in the world.

The Hong Kong Monetary Authority, the country’s central bank, is among the best capitalized on the planet.

Plus the government is awash with cash and routinely runs substantial budget surpluses.

Hong Kong has virtually zero debt, and nearly $1 trillion Hong Kong dollars ($126 billion) in net foreign reserves.

That’s a public savings account worth roughly 40% of the country’s GDP.

Hong Kong’s Net International Investment Position, which is essentially a reflection of the government’s ‘net worth’ is about $1.25 TRILLION, or 380% of GDP.

This is nearly unparalleled. By comparison, the US government’s net worth is NEGATIVE $65 trillion– roughly NEGATIVE 350% of GDP, versus Hong Kong’s POSITIVE 380% of GDP.

One country is broke. The other is a financial fortress.

And while the US government’s liabilities keep mounting, Hong Kong’s foreign reserves keep increasing.

Between the two, it’s pretty obvious that Hong Kong is in vastly superior financial condition. And that’s what makes the Hong Kong dollar so compelling.

By holding Hong Kong dollars, you essentially get all the US dollar benefit without having to take the US dollar risk.

If the US dollar remains strong, the Hong Kong dollar remains strong. The two are virtually interchangeable.

But unlike holding US dollars (where your savings is linked to a bankrupt country), Hong Kong dollars are backed by one of the most solvent, fiscally responsible governments in the world.

So if there were ever a US-dollar crisis, Hong Kong could simply de-peg its currency… meaning anyone holding Hong Kong dollars would be insulated from the consequences of the US government’s pitiful finances.

It’s like having a free insurance policy… which is what an effective Plan B is all about.

Right now is a good time to think about moving some savings into Hong Kong dollars.

The Hong Kong dollar spent the last several years at the extreme ‘strong’ end of its trading range (7.75 HKD per US dollar).

It’s now back to 7.80, right in the middle of normal trading range, so it’s a slightly better entry point.

If you find that the Hong Kong dollar is not for you, in general it still makes sense to diversify at least a portion of your assets away from your home country’s currency…

… especially if your currency happens to be overvalued.

The US dollar has been artificially strong over the past few years. It began a multi-year surge back in 2014 for no apparent reason.

GDP growth was tame, US debt kept piling… there was no fundamental, logical reason for the US dollar’s sudden strength.

I took advantage of this anomaly by trading overvalued US dollars for high quality assets (businesses, shares, real estate) in countries with undervalued currencies– like Australia, Chile, Colombia, Georgia, UK, Russia, Canada, etc.

This strategy decreased my risk and increased the odds that the investments will perform well.

As an example, I bought some assets denominated in British pounds (GBP) immediately after the Brexit vote when the pound sank below $1.20. The pound is now around $1.32, about 10% higher.

So even without factoring in the share price appreciation or dividends, those GBP investments have already made 10% in US dollar terms.

In Australia, I acquired a private business at a time when the Australian dollar was at a multi-year low. Similarly, the Aussie dollar is up 10% since then, so there’s already a built-in gain.

The US dollar has definitely lost some ground this year and isn’t as strong as it was in 2015 and 2016.

But the US dollar index is still at a higher level than its long-term, trade-weighted average, so there’s more room for the dollar to weaken.

This means it’s still a good idea for US dollar holders to consider some high quality foreign assets… and at a minimum, think about that free Hong Kong dollar ‘insurance policy’.

Do you have a Plan B?

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Storm-Clouds's picture

Plan B is bankrupt...

Son of Captain Nemo's picture

To the U.S. Central Bank... Don't forget this (https://southfront.org/russias-central-bank-made-first-step-in-creating-...) oil/gas/uranium and Precious Metal backed beauty NO ONE ELSE "HAS"!

Night!... Night!!!...

JohninMK's picture

Sounds a great idea, but lets not forget a fact not mentioned.

Which country is Hong Kong a part of? Might that country absorb HK's carefully accumulated reserves in a time of US$ stress?

Son of Captain Nemo's picture

Trust me JMK.

That British "protectorate" still owned by the BOE will have it's cousin in North America Forrest Gump start WWIII before that dream of sound money taking over ever sees the "light of day"!!!

Like a good Zio that "We The State" are... If I Don't "Control" It... No One Else Will "Either"!!!

swmnguy's picture

Simon doesn't seem to be make sense about the fact that HK's Dollar is pegged to the US Dollar.  He says the peg makes the $HK more stable than...the currency it's pegged to?

buttmint's picture

...another fluff piece by Simon Black, International EgoMan

give it a skip

Spectre's picture

He clearly states why it makes sense. Trading range for 30 years of 7.80, while Usd has been all over the place. The best part would be HK could depeg after the USD finally implodes. All plus’s to me.

frank further's picture

"could" aint the same as "will"

synthetically derived's picture

"He clearly states why it makes sense. Trading range for 30 years of 7.80, while Usd has been all over the place."

Overlooked here seems to be the actual mechanics of pegging. If the Hong Kong Dollar has long remained at a near constant peg of 7.80 Hong Kong Dollars to one USD, then the Hong Kong Dollar has gone "all over the place" in lock step with the (wildly fluctuating) USD (to which it has been so consistently pegged).  

 

JamesBond's picture

Always invest in oil, coffee, tea, and sex. They always hold inherent value.

moorewasthebestbond's picture

Gold-Yuan?

 

Gold-Drachma?

 

Show me.

1 Alabama's picture

And I like plan B.

 

cat2005's picture

Article is bullshit in claiming Hong Kong has little debt.

opport.knocks's picture

In 2016 Hong Kong public debt was 175 million euros 193 million dollars, has increased 0 million since 2015. This amount means that the debt in 2016 reached 0.06% of Hong Kong GDP, as in 2015, when it was 0.06% of GDP.

https://countryeconomy.com/national-debt/hong-kong

D-plorable's picture

Maybe the USD surged due to the "end" of QE?

Lost in translation's picture

I like HKD.

Dubai banker got me into it.

Is-Be's picture

Yes but,

is Hong Kong building nuclear weapons? Has Hong Kong got piles of Weapons of Mass Destruction? Is Hong Kong ruled by a vile despot?

In short, is it our destiny to bring freedom and democracy to Hong Kong?

Cookies, anyone?

Dickweed Wang's picture

Most of you already know this but gold holds it's value over time the best of all against all currencies, particularly the USD.  Assuming that the USD has lost 98% of its value since the Feral Reserve was insituted in 1913 (when gold was $25/oz), the current price of gold should be around $1,250 to show it holds its value over time. Surprise! That's almost exactly what gold is going for right now (rigged market or not).

BTW . . . using the same concept, silver should be going for around $87.50/oz or so right now (assuming a price of $1.75/oz in 1913) - which would put the gold to silver ratio at around 1 to 14 (which is close to what it should be considering the in-ground ratio of gold to silver of around 1 to 9).  I guess that really proves the silver market is rigged (suppressed) much more than the gold market is.

King of Ruperts Land's picture

Crustal ratios may be 1:9 for Gold an silver, but silver occurs in much more concentrated deposits and with base metal ores. Much of the gold is widely distributed in uneconomic concentrations.

50:1 is a better ratio if you look at the economics of production:
1 oz/ton is a good gold ore
50 oz/ton is a good silver ore.

The ratios are a problem with a bi-metalic money system. That problem seems minor and quaint in retrospect.

AnarchistRex's picture

Core problem is that all fiat currencies are linked to a STATE. State's are fickle, therefore the value of the currency is fickle. I grant that HK may be the least fickle in your list, but why bother with fickle at all?

Crypto-currencies are mathematically defined - they are NOT fickle and can never be.

Exponere Mendaces's picture

...or just tell the central bankers to fuck off and hold Bitcoin instead.

The swiss were pegged until they weren't. Its happened to other shitty fiat currencies. Why the fuck would you hold HKD when the centralized government could step in and declare your investment null and void?

You've got to be fucking kidding me.

But thats the kind of advice you get on ZH, buy Puts until you go broke, hold shitty fiat until you are debased into poverty. Oh, and gold - which hasn't done fuckall even with Rocket Man threatening a nuke strike. That's your safe haven? What a fucking joke.

 

milanolarry's picture

A big portion of HK's so-called reserve is invested in US's treasury bills. If the US used inflation to wash away its debt, or simply defaulted, HK could became an empty shell overnight.

GodSpeed_00's picture

I'll stick to my decentralized crypto, thanks.

Manipuflation's picture

I was thinking about buying some Russian crypto currency but it is not a hot topic around this household.  I would know.  Russians are like "What is this scam?".  There was something in the conversation about "Are you an idiot?".  I can't argue that.  But at least I can say that I have a batch of the early 1920's coins.  Those coins are a passion of mine.  I have evidence.  You can't explain them away.  I don't care if it is Putin because he wouldn't have an answer.  Sovietism is why most of those coins were destroyed.  They wanted erase history but I will do no such thing.  I just have to keep searching.

 

Russains are good people and like showing some of my Russian coins to them.  They are amazed.  Most of them say, "I have never seen that before".  Well, now you did, and I know full well how hard it was to find.  It is not about making money for me.  I love reading about history.  Like a museum.  It explains so much.  I have some Russian wire money here somwhere.  Russian coins are incredible.

Don't get too lost in this history.

  http://www.metaldetectingworld.com/hammered_wire_silver_coins.shtml

ThinkAgain's picture

The USA driven by the supremacy attached hubris will always flee escape by running even more forward. You can be sure that they will try to annex the Euro (as the problem 'solver' for at least South Europe, but don't underestimate the level of self-hate and transatlantic irrational love in North Europe). See http://www.planck.org/publications/Global-West-Common-Currency-Union. 1971 all over again. And it will happen. The Global West is detached of its foundations, ruled by special interests. The soft empire system worked (to the benefit of the few at the cost of the rest). Europe was independent. The EU on the other hand is a client state of the USA (see https://www.google.com/search?q=funding+early+european+movement). No problem, the past is the past. But today it is not different. I wish Europe still had real leaders. Guys like https://www.google.com/search?q=de+gaulle+usa, who had a more healthy relation with the USA than all those transatlantic clients/worshipers. Anyway: the dollar will expand geographical before it will be imploded by hyperinflation (which will lead to a collapse of the economy of the Global West: delivering the Global West a post USSR / Russia 1991/1992 experience). Hubris is a bitch.